Financial Statements 101: Balance Sheet
The Balance Sheet has a formula to determine how much equity is in the business Assets – Liabilities = Equity. This is similar to your personal net worth.
You will need to look at your balance sheet no less than annually.
Here is a list of assets, liabilities and equity normally found on a balance sheet.
List of Assets potentially found on a Balance Sheet:
a. Current – Assets that can be turned into Cash in the current year
b. Long Term – Assets that cannot be turned into cash within the year
c. Fixed – Tangible assets such as equipment, vehicles, furniture etc.
d. Intangible – Examples include Incorporation Cost and other contractual assets
e. Goodwill – When you purchase a business for more than the Balance Sheet Value
f. Patents – Patents are considered an asset
List of Liabilities found on a Balance Sheet
a. Current – Liabilities that will be paid within the current year
b. Long Term – Liabilities that will not be paid within the current year
List of Equity found on a Balance Sheet
a. Net Income – Income minus Cost of Goods Sold and Expenses
b. Retained Earnings – Sum of the company’s profits and losses year over year
c. Share Capital – amounts paid by Shareholder’s to acquire Shares as well as shares bought back by the corporation.
Here are some important points you need to know Balance Sheet Accounts for Planning:
a. Shareholder Loan – When you put personal funds or personal assets into the Corporation, the Corporation will now show a Shareholder Loan in the liability section of the balance sheet. It is important that the shareholder loan is positive or at zero at each year-end. If it is negative, it will show up as a receivable on the Balance Sheet and CRA could deem this as income to the Shareholder.
b. Retained Earnings – Retained Earnings is a sum of the company’s profits and losses, less dividends declared, from the beginning existence of the Corporation. If you want to issue dividends, it is important that your Retained Earnings is positive. Corporations can only issue dividends to the shareholders up to the amount of positive retained earnings held by the Corporation.
Remember, you should be looking at your financial statements on a regular basis. Compare previous ones with your current statements as these will assist you in making good management decisions for your business.
More importantly, do not forget to let us know if you need help with your financial statements! We will go further in depth on analyzing your financial statements and help you in building your successful business!